Ch06

The Production Process: The Behavior of Profit- Maximizing Firms

Production ,[object Object],[object Object]

What Is A Firm ? ,[object Object],[object Object]

Perfect Competition ,[object Object],[object Object],[object Object],[object Object],Perfect competition is an industry structure in which there are:

Homogeneous Products ,[object Object]

Competitive Firms are Price Takers ,[object Object]

Demand Facing a Single Firm in a Perfectly Competitive Market ,[object Object]

The Behavior of Profit-Maximizing Firms ,[object Object],How much of each input to demand 3. Which production technology to use 2. How much output to supply 1.

Profits and Economic Costs ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Normal Rate of Return ,[object Object],[object Object]

Calculating Total Revenue, Total Cost, and Profit  $ 1,000 a Profit = total revenue  total cost $15,000 Belts from supplier 14,000 Labor Cost 2,000 Normal return/opportunity cost of capital ($20,000 x .10) $31,000 $30,000 $20,000 .10 or 10% a There is a loss of $1,000. Total Cost Costs Total Revenue (3,000 belts x $10 each) Initial Investment: Market Interest Rate Available:

Short-Run Versus Long-Run Decisions ,[object Object],[object Object],[object Object]

Short-Run Versus Long-Run Decisions ,[object Object]

Determining the Optimal Method of Production ,[object Object],Determine total cost and optimal method of production =Total profit Total revenue  Total cost with optimal method Determines total revenue Input prices Production techniques Price of output

The Production Process ,[object Object],[object Object],[object Object]

The Production Function ,[object Object]

Marginal Product and Average Product ,[object Object],[object Object]

The Law of Diminishing Marginal Returns ,[object Object],[object Object]

Production Function for Sandwiches 7.0 0 42 6 8.4 2 42 5 10.0 5 40 4 11.7 10 35 3 (4) AVERAGE PRODUCT OF LABOR (2) TOTAL PRODUCT (SANDWICHES PER HOUR) (3) MARGINAL PRODUCT OF LABOR Production Function 12.5 15 25 2 10.0 10 10 1   0 0 (1) LABOR UNITS (EMPLOYEES)

Total, Average, and Marginal Product ,[object Object],[object Object],[object Object]

Total, Average, and Marginal Product ,[object Object],[object Object]

Production Functions with Two Variable Factors of Production ,[object Object],[object Object],[object Object],2 10 E 3 6 D UNITS OF CAPITAL (K) UNITS OF LABOR (L) Inputs Required to Produce 100 Diapers Using Alternative Technologies 4 4 C 6 3 B 10 2 A TECHNOLOGY

Production Functions with Two Variable Factors of Production 20 21 24 33 $52 (5) COST WHEN P L = $1 P K = $1 12 9 8 9 $12 (4) COST WHEN P L = $1 P K = $1 2 10 E 3 6 D (2) UNITS OF CAPITAL (K) (3) UNITS OF LABOR Cost-Minimizing Choice Among Alternative Technologies (100 Diapers) 4 4 C 6 3 B 10 2 A (1) TECHNOLOGY

Ch06

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